Do I have to get a Commercial Loan?

Question

Hey BP, I have a question. I am trying to find my first deal here in Quincy IL, and am currently renting myself. One bank has told me that to purchase a property as a rental, it has to be a commercial loan. The variable rate  would require 20% down and is amortized over 15 years, maybe 20. Another realtor told me the same thing, If I'm going to buy a rental, I'll need to have a commercial loan. What are my options? I have about 10k at my disposal and am trying to get my first investment property under my belt.

Jon Holdman · Answer

If this is a 1-4 unit property and you're buying it in your personal name, and you don't already have 10 mortgaged properties then you need to talk to more banks. If you have three or fewer mortgaged properties, you're buying in your name, and its a 1-4 unit property you should be easily able to find a bank that will do investor loans. You don't need any charts or graphs or any sort of business plan. You do need a 20% down payment for a SFR, 25% down for 2-4 units, good credit, and income from other sources to qualify for the loan. Conventional loans with 30 year fixed rate terms are readily available with those qualifications.

If you don't have the required down payment (plus closing costs), then a low-down FHA loan and house hacking (occupying one unit of a multi) is the way to go.

Jay Helms · Answer

@Nick Tzenevrakis - if you're buying 1 to 4 units, you should be able to obtain a conventional mortgage. Any property 5 units+ is considered commercial and will require a commercial loan.

Given you have a small amount at your disposal, look at duplex, triplex, or 4plex where you can live in one unit and rent out the rest. This will allow you to potentially qualify for a FHA or low money down on a conventional/residential loan.

Hy Schmiedeskamp · Answer

Hey Nick, what I've found is the property is over 4 units then you will usually have to get a commercial loan.  4 and under and you can find banks to do regular loans. I have commercial loans through Central State because they are a "portfolio" lender, meaning I can group a couple properties together under one loan and they hold onto the note. They aren't selling them off so they can work the deals a little as they don't have to meet Fannie Mae guidelines. Terms are going to be better though with a regular Fannie Mae type mortgage.

I didn't have business models, no fancy graphs, just sat down with a few bankers and asked questions, gave numbers and eventually made some deals.

Alexander Felice · Answer

If you're trying to get a loan for an LLC, then yes you need a commercial loan

if it's a residential home, put it in your personal name and get a fannie mortgage.

Diane Campochiaro · Answer

Nick,

If you're buying a 2-4 unit apartment property you can get a residential loan.  Anything 5+ units you'll need to get a commercial loan, regardless of whether you live there or not.

Nick Tzenevrakis · Answer

I do not have an LLC, and I would consider moving into a MFR. I need to speak with a few more banks about my situation. I have meetings scheduled this week with 2 different banks here in town. I will get a hold of Central State, it sounds like that may be the place to go.

Thanks for the feedback guys.

Sri Voodi · Answer

No you don't have to get a Commercial loan to buy a investment property. You can get a conventional loan to fund the purchase. If it is going to be investment property, some bankers will want you to shell down 25% as down payment. With 25% you get a good interest rate as well.

John Peine · Answer

@Nick Tzenevrakis great idea if you don't want to live in the building.  Shop around for banks, one will eventually say yes.  It just depends how much you want to shop around.

As for living here usually the requirement is only 1 year.  In November I am looking to move out of my first house, maybe.  Depends on what I find.

@Hy Schmiedeskamp you can have those high level meetings without charts and graphs.  The bankers also know you. You have a portfolio with them, and I assume you have shown a consistent ability to close and follow through.  Nick is not you.  My advise was for someone who isjust starting out, has no previous deals, little equity.  I am a lot like where Nick is.  If I try to walk into a bank with how you conduct business they show me the door. All the bank officers I have talked to said that is how they would take my deal 100% seriously the first time.  It shows you are putting in a lot of effort.

Do I have to get a Commercial Loan?

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